Mike Collier in Riga -

Frustrated by the Latvian government's refusal to privatize airBaltic and angered by disparaging comments from a government minister, Scandinavian airline SAS has lost patience and decided to sell its stake in airBaltic, the Latvian national carrier. Who will take up the stake of this growing and profitable airline, which has put its Lithuanian rival FlyLAL to shame?

The news broke in Stockholm on August 14 when SAS spokesman Mikael Lindberg was asked by Reuters if SAS would sell its minority holding in airBaltic. "I can confirm that," came the brief but informative reply. The Latvian state holds 52.6% of the company shares and SAS holds 47.2%.

Almost as brief, if rather less informative, was a single-line statement issued by airBaltic CEO and chairman Bertold Flick in response: "The announcement of SAS to divest and sell its stake in airBaltic does not change the current growth and development strategy of the airline." Since then, Flick has refused further comment.

But the imminent departure of such a major shareholder cannot fail to have some effect, and the question now turns to who would be interested in buying a minority stake, as the Latvian government is unlikely to take up its first-refusal option while simultaneously trying to cut its expenditure.

Split divisions

bne understands that two separate divisions operate within the airline, with airBaltic West responsible for routes to Western Europe and Scandinavia (SAS's heartland) and airBaltic East taking care of routes to the Caucasus and beyond. The exact structure remains unclear, but it is possible any sale would affect the western wing more than the eastern. Given the cash-strapped nature of the aviation sector while oil prices remain high, it seems as likely that institutional or private investors in Russia and the CIS will express an interest as it is that a traditional aviation industry player will register at check-in.

The news prompted unmistakable schadenfreude in Lithuania where airBaltic has been stealing passengers from local carrier FlyLAL and crowing about the fact. There's little love lost between the two airlines and that extends right to the boardroom.

Gediminas Ziemelis, whose Zia Valda conglomerate controls numerous companies including FlyLAL, is a master of raising capital and business development, and is behind an ongoing drive to modernise and monetise FlyLAL, which could be a realistic buyer for at least part of SAS's stake. He told bne on August 15 that if SAS's shares are on the table "We will estimate this option" - but not before he had made stinging observations on the management of airBaltic.

"If SAS selling its stake, it shows that something is wrong with airBaltic or its management," he said. "We have been watching airBaltic since last year. Since early 2007 the company has changed dramatically. They made a lot of mistakes and maybe the personal egos of Flick and [Latvian transport minister] Slesers pushed the company to unplanned losses."

"They were wasting money on unreasonable things," Ziemelis said. "They were trying to occupy the entire Baltic market and were dumping prices in Vilnius for the same routes FlyLAL was flying." SAS's decision came partly from a sense of impotence when it tried to stop such money wasting practices, Ziemelis believes.

Regardless of commercial rivalries, Ziemelis is right to say that ego has played a role in the whole affair, even if its exact nature is debatable.

SAS has never made a secret of its desire to own airBaltic and rumours that it was on the verge of doing so have been a staple of Baltic business gossip for years. However, it finally threw in the towel after transport minister Ainars Slesers slapped down SAS in June, declaring: "AirBaltic would develop more successfully without SAS as the big brother... SAS needs to earn a profit to cover expenses in the Scandinavian market, while opening new routes without considering profits is our priority."

Not only do such statements leave a bad taste in the mouth considering that SAS has been airBaltic's partner for 13 years, helping establish the fledgling company in 1995, but it would have been doubly galling as three years ago Slesers said: "The only real solution is to negotiate the buy-out of the state-owned stake by SAS."

Now Slesers and his government colleagues will have the perfect opportunity to see how viable it is to open unprofitable routes during a recession. Following SAS' decision, Slesers seemed to be in denial, saying the SAS announcement was not related to the government's refusal to privatize airBaltic as much as differing opinions about the development of the company.

But SAS spokeswoman Elisabeth Manzi denied this when bne contacted her. "The Latvian state has decided not to privatize airBaltic. This means SAS cannot become the majority shareholder and so the board of SAS decided to sell our share," she said. "We got involved with airBaltic with the aim of becoming majority owners, so in that sense we are regretful that we will have to pull out."

SAS would not put a price on its stake in airBaltic and no timeframe for the sale has yet been worked out, though local press reports put SAS' stake at around €71m.

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